– EURUSD continues to ride its daily 8-EMA lower, a trend in place since December 17.

– The retail crowd has built up a net-short EURUSD position after selling into the recent rebound.

– Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

In the week after a ‘decidedly’ Euro-negative election in Greece, the market’s reaction wasn’t all that negative: the 18-member currency was the top performing major currency. Even as the anti-bailout, anti-austerity Syriza party rode a wave of populism into power – the first non-mainstream party to do so in Europe, a galvanizing moment for other fringe factions like Spains’ Podemos – market participants haven’t embraced the narrative of an existential crisis for the Euro-Zone. After touching an 11-year year low below $ 1.1100, EURUSD closed the week at $ 1.1276, a +0.77% gain, while EURCHF, the bellwether for fear in Europe, added +5.09%.

Traders expecting contagion to spread to other periphery nations have thus far been disappointed, even as financial markets bear down on Greece. The Greek-German 10-year yield spread blew out to its widest levels in six-months at 1049.0-bps, well-above the six-month average of 658.1-bps. Yet with bond yields falling across the region, the threat of a financing crisis was absent elsewhere. The Italian-German 10-year yield spread finished the week at 128.5-bps, below its six-month average of 143.7-bps, and the Spanish-German 10-year yield spread closed Friday at 110.8-bps, below its six-month average of 122.1-bps.

Given financial conditions in the broader Euro-Zone and the European Central Bank’s new QE program set to begin in March, traders may feel that, if there were ever a ‘good time’ for a panic over Greece, now would be that proverbial sweet spot. But let’s be clear: this isn’t a ‘just right’ Goldilocks moment. With new Greek leadership juggling the demands of its electorate as well as the desire to remain a full-fledged member of the Euro-Zone, and six-weeks until the ECB’s QE program begins, the Euro has now entered a headline-driven cycle.

One such example of how markets have shifted their focus to the newswires has been the recent outperformance of Euro-Zone data, and how little attention it’s been given. The Citi Economic Surprise Index ended the week at +10.0, the highest level since January 5 (+12.4), and close to being at its highest level since Q1’14. The fact of the matter is that positive economic developments – at least, relative to what markets are expecting – haven’t been feeding into higher inflation expectations.

The 5-year, 5-year inflation swap rate, a measure used by central banks and dealers to gauge market’s future inflation expectations, closed the week at 1.575%. Inflation expectations have consolidated between 1.453% (January 13 low) and 1.822% (January 23 high) as recent positive economic data hasn’t fed into expectations of a longer-term rebound in the region’s growth prospects. As long as this feedback loop is broken – good news not feeding into higher inflation expectations – the Euro has little chance to break from the current ‘sell rallies’ mindset that traders have embraced.

Overall, the market is still heavily-skewed to the short side in the Euro, with 184.8K net-short contracts on speculative traders’ books in the futures market. But this figure hasn’t changed all that much in recent months, and isn’t exactly indicating that we’ve reached a short-term extreme. For the week ended January 20, there were 180.7K net shorts; for the week ended November 4, 2014, there were 179.0K net shorts. As we discussed back on November 5, the influx of capital into the Euro-Zone the last few years may allow overstretched short positioning in the Euro and long positioning in the US Dollar to persist, which it has for the past three-months. Now, as traders await the ECB’s QE program to kick off in March, it’s clear that the headline-driven market is a veritable state of purgatory for the Euro. –CV

To receive reports from this analyst, sign up for Christopher’s distribution list.

original source

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.Learn forex trading with a free practice account and trading charts from FXCM.